- Book value or carrying amount: The value at which an item is recognized in the financial statements.
- Tax base: The value recognized for an asset or liability for income tax purposes.
The monitoring of both the book value and tax base of the entity’s financial data can be done in a way that is secured and will assure that all the necessary information will be able to be extracted in order to be used for the preparation of the financial statements, tax returns and the process of auditing. In many cases the value of an item which is recognized on the book value, differs from the value which is recognized on the tax base.
According to Law 4308/2014, the entity keeps, as part of its accounting system, a record of every transaction and event that takes place during the reporting period.
The Income Tax Code (Law 4172/2013) according to the provisions of article 22 and article 23, defines the rules for the deduction of business expenses from gross income. With the provisions of article 22, a general rule is established that, in principle, all expenses are deducted when they:
- are carried out in the interest of the company or during its usual commercial transactions,
- correspond to a real transaction whose value is not considered lower or higher than the market value on the basis of the data available to the Tax Administration and
- are registered in the accounting records (books) of the business in the period they are carried out and proven with appropriate supporting documents. The above three conditions must be met cumulatively for the expenses to be deducted.
The provisions of the article 23 refer to the restrictive list of non-deductible expenses. Therefore, the rule that is introduced is that any expense that meets the criteria of article 22 and at the same time does not fall under article 23 is deducted from the gross income. The different tax treatment of financial events in relation to the accounting treatment, generates differences which are divided into temporary and permanent differences.
According to the definition given in Annex A of Law 4308/2014, a temporary difference is the difference between the carrying amount of an asset, liability or other element of the financial statements and its tax base, which the entity expects to affect in the future, the taxable results, when the carrying amount of the asset or liability will be recovered or settled, or in case other items of the financial statements, when taxable results will be affected.
Common cases where temporary differences take place are: impairments of assets, depreciations, provisions, non-payment of social contributions, undercapitalization interest of art. 49 of Law 4172/2014, exchange rate differences, etc.
Permanent differences between the accounting and tax base are the differences which are not reversed, such as the expenses referred to the article 23 of Law 4172/2014, that they are not deducted from the income of the year except for unpaid social contributions and provisions other than those that consists of depreciation of bad debts (article 26 n.4172/2014). The specific expenses are registered in the tax reform statement, which is submitted with the income tax return.